Making use of lulls in the storm

The period between 1997 and 2000 proved relatively calm for Embraer, at least by the standards of the global airline industry and the early 1990s in Brazil. As the sales of the ERJ-145 took off, Embraer executives took advantage of the break in the action to position the company to seize future opportunities and avoid or respond to sudden-death threats that might emerge in the future.

Continuously improve operating efficiency Although Embraer had a long history of new product innovation, the company’s engineering prowess had not translated into efficient production processes. Embraer had introduced quality improvement programs in early 1985, but these were executed in a fragmented and half-hearted manner. In 1996, Embraer top executives initiated a business process redesign project to implement Total Quality Management techniques in all of the company’s processes. Embraer also worked with external partners including McDonnell Douglas, Boeing, and the International Organization for Standardization to provide external certification of quality, as well as guidance on how to improve Embraer’s internal processes to achieve higher quality targets. Embraer also invested heavily in information technology – not only for the design and engineering, but for all financial reporting systems as well. These actions together enabled Embraer to cut its production cycle by half, while increasing revenues per employee five-fold.

Build stock of slack resources Aircraft design and production is a capital-intensive business, and demand is volatile. In such industry, a large cash reserve provides a cushion against unforeseen threats and for unanticipated opportunities. This holds whether a company is based in Brazil or anywhere else in the world. Embraer management took several steps to build a war chest of cash during the years when it faced neither a sudden-death threat nor a golden opportunity. In July 2000, Embraer was listed on the New York Stock Exchange, and raised $446m. Embraer also assumed a very conservative financial position, avoiding debt and building a stockpile of $696m net cash on its balance sheet by June 2001. Some analysts condemned Embraer’s financial policies as overly cautious in a growing market, particularly at a time when competitors were loading up on debt to invest in new product development. Bombardier, for example, held $1bn in long-term debt on its balance sheet while Fairchild Dornier was estimated to have $700m in debt by June 2001.

Identify and manage risks In order to reduce its dependence on the commercial airline industry, Embraer made a strategic decision to expand its defense business in 1999. Defence contracts had historically been vital to Embraer, but after the end of the Cold War dropped to under 5 per cent of revenues. Trying to increase its defense stake entailed significant risk. Reentering the defense business required a large up-front investment and designing military products brought significant technical and customer risk. In 1999, Embraer sold 20 per cent of its voting shares to a consortium of French aviation and defence companies (including Dassault Aviation, Thales, Aerospatiale-Matra, and Snecma). The association with the French defence companies – dubbed the “French Connection” by the Brazilian press – allowed Embraer to diversify its revenue streams. Working with partners, rather than attempting to do it alone, allowed Embraer to parcel out much of the technical and market risk to partners. By 2002, Embraer delivered its first product and in that same year, the company formed a consortium with its French partners to bid for the renewal of Brazil’s fleet of supersonic fighter aircraft. Although the purchase was delayed to 2004, Embraer was well positioned to win the business going forward.

Leading in turbulent times

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Don Sull is professor of management practice in strategic and international management, and faculty director of executive education at London Business School. This blog is dedicated to helping entrepreneurs, managers, and outside directors to lead more effectively in a turbulent world.

Over the past decade, Prof Sull has studied volatile industries including telecommunications, airlines, fast fashion, and information technology, as well as turbulent countries including Brazil and China, and found specific behaviours that consistently differentiate more, and less, successful firms. His conclusion is that actions, not an individual’s traits, increase the odds of success in turbulent markets, and these actions can be learned.